Plosser Says Fed Should Exit Mortgage-Backed Securities Market

Federal Reserve Bank of Philadelphia President Charles Plosser said he favors phasing out the Fed’s purchases of mortgage-backed securities.

“It’s not good for the bank to be holding lots of mortgage paper” and “I would like to see us get out of mortgage-backed securities,” Plosser said in an interview with Manus Cranny on Bloomberg Television in Milan today. “But that’s not going to happen very quickly.”

The pace of withdrawal “is something we’ll have to discuss,” Plosser said, adding that “at the end of the day, we’re going to do what’s best for the U.S. economy.”

Plosser, who doesn’t vote on the Federal Open Market Committee until 2014, is in favor of reducing the Fed’s $85 billion monthly pace of bond purchases as unemployment declines. However, officials including St. Louis Fed President James Bullard said last month that persistent disinflation may require the Fed to provide additional stimulus. Fed policy makers, who have kept the benchmark interest rate close to zero since 2008, next meet on June 18-19.

Officials have to be aware of the impact of a zero interest-rate policy and “mindful of unintended consequences,” Plosser said. “The question is that as the drag from the labor market begins to wane, will the impact of the extra liquidity take off? If we wait too long, will we be behind the curve?”

Plosser added that central banks shouldn’t react to markets when determining their policies.

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